Quick Bites | OECD Warns Severe Global Slowdown if ME Conflict Prolonged

The global economy is set for a significant slowdown this year as higher energy costs weaken consumer spending and business investment, but it could become much more severe if the conflict in the Middle East drags on into 2027.

In a quarterly report on the global outlook, the Organisation for Economic Co-operation and Development (OECD) said worldwide output is likely to grow by only 2.8% in 2026 – even if energy production in the Persian Gulf starts to recover later this month and transport through the Strait of Hormuz returns to normal. That would mark a sharp slowdown from the 3.4% expansion recorded last year.

Source: FT

The OECD said that should the disruption to energy production and shipping stretch into next year, global growth could slide to 2.1% in 2026 and 1.8% in 2027.

If the latter outcome came to pass, it would be the weakest year of growth this century, with the exceptions of 2020 (the Covid-19 pandemic) and 2009 (the GFC).

In this “protracted” scenario, parts of Asia would be among the hardest hit. Much of the energy that usually transits through the Strait of Hormuz is heading for Asian ports. China, Japan and South Korea, among others, have large reserves of oil that have ensured the economic impact of the Strait’s closure has so far been limited.

That would change if the closure was long-lasting. But the impact wouldn’t be confined to those countries most reliant on the Gulf for their energy supplies.

“Many economies in Asia are likely to be hit heavily, reflecting their relatively high reliance on energy inputs from the Gulf economies, but higher inflation, shortages, tighter financial conditions and weaker confidence are also likely to weaken growth significantly in Europe and North America,” the OECD said.

Source: FT

The OECD said the slowdown could be severe enough to push several economies into recession.

Should the conflict prove to be of shorter duration, the OECD continues to expect the US economy to grow by 2% this year, outpacing the eurozone at 0.8% and Japan at 0.6%. It edged up its growth forecast for China to 4.5% (from 4.4% in March).

However, the OECD warned that a protracted disruption to supplies from the Gulf that led to a further rise in energy costs would likely weaken investment in artificial intelligence, which has been a key driver of US economic growth.

It noted that energy accounts for 60% of the costs associated with data centres, while the manufacture of semiconductors requires helium, and a third of the world’s supply of that gas comes from the Gulf. In addition, higher energy costs in Asia would hit production of essential equipment.

“The production of…hardware that underpins AI systems is highly electricity-intensive, reflecting the energy demands of advanced lithography, clean-room operations, and cooling systems,” the OECD said.

As long as the duration of the conflict proves to be relatively short, the OECD said most central banks don’t need to raise their key interest rates. It expects inflation in the Group of 20 leading economies to rise to 4% this year from 3.4% in 2025, but fall back to 3.1% next year.

But if the conflict proves long-lasting, it expects G-20 inflation to be 4.4% this year and 4.7% in 2027. In response, central banks would likely raise their key interest rates by between 50bps and 75bps.

The OECD said those central banks that are reducing their portfolios of bonds purchased under quantitative easing programs may have to suspend that process, and may even have to resume QE to calm bond markets.